24 Aug 2018
Zero Hora, one of Brazil’s largest circulation national newspapers, published an interview in its August 6, 2018 edition with Professor Brian Lepard. (A reproduction of the page containing the interview can be found here. An online version is available here.) Professor Lepard is the Harold W. Conroy Distinguished Professor of Law at the University of Nebraska College of Law and a recognized expert on tax law, including international tax law.
The interview concerned the Tax Cut and Jobs Act adopted by Congress and signed into law by President Trump in December 2017. The interview was conducted by Zero Hora economics columnist Marta Sfredo with Professor Lepard while he was in Porto Alegre, Brazil. Professor Lepard gave a major talk, sponsored by the Instituto de Estudos Tributários (Institute for Tax Studies), on the tax law and its implications for Brazilians and Brazilian companies. He also taught a one-week course entitled “Hot Topics in International Law” at the Universidade Federal do Rio Grande do Sul (“UFRGS”). Furthermore, he was a guest speaker in a course at the Pontifícia Universidade Católica do Rio Grande do Sul (“PUCRS”) on freedom of expression and the regulation of hate speech under international law.
The published version of the interview was captioned, “Capital Responses – Brian Lepard, Professor of the University of Nebraska.” Here is an English translation of the interview:
“The Base of Taxation is Income”
The American tax expert Brian Lepard, professor at the University of Nebraska, in the United States, was in Porto Alegre for the inaugural class of a course sponsored by the Institute for Tax Studies. In good Portuguese, using English only to avoid ambiguities, he offered an interview for this column reinforcing critiques of Donald Trump’s tax reform and the Brazilian system. He recounted that he learned the Portuguese language in a three-month course, motivated by cooperation agreements that the University has with UFRGS and PUCRS.
Question: It is said that the tax reform can stimulate the American economy, which is already strong, even more. Going forward, can this cause a whiplash effect?
Response: Yes, there is a perception that it is not necessary to have a tax stimulus in the economy at this moment. There are doubts about whether it was necessary. The effects can be diminished because the economy is growing. Normally, there are stimuli during periods of crisis or slow growth.
Question: Would there be better effects in a slower economy?
Response: We have other examples, not only from the tax system but involving the direct injection of money by the U.S. Government and the lowering of interest rates. These types of intervention are more effective in periods of recession or slow growth. But there is the perspective that lower rates for corporations are good in the long term. Before, the U.S. had corporate tax rates of up to 35%, which were higher than in most of the rest of the world and were a disincentive to investment. Businesses went to other countries. One purpose of the new law was to eliminate that problem.
Question: What are some other points concerning the new law?
Response: Another question regarding the law is why it reduces the rate applicable to corporations and not as much the rate applicable to individuals. The law reduces the rate for individuals, but not by much. Before the new law, the highest rate was 39.6% for the wealthiest, which fell to 37%. In the tax reform act adopted under the Ronald Reagan Administration, in 1986, the rates applicable to individuals were reduced much more, from almost 50% to 28%. So in this new law the reduction was much smaller. Congress also hoped that corporations would use the tax reduction to make investments, create jobs, and pay more to their employees. The effects have been more muted in these areas. Some corporations have announced they are paying a little more to their employees, but many are using the tax savings to buy back their own shares on the stock market. If the price is considered low, the corporation can benefit by buying back its own shares because in the future it can sell them for a higher price.
Question: Would the appropriate reaction of Brazil to the American reform be simplification?
Response: Yes, simplification. This was one of the purposes of the 1986 tax reform act. In Brazil, there are many taxes on consumption -- the purchase of goods and services. I understand that almost 50% of Brazilian government revenues come from taxes on consumption of some kind. By contrast, only 20% of revenues come from taxes on income. In the U.S., the situation is almost reversed. Taxing income is better from the point of view of equity. The richest earn more and therefore pay more, leading to a progressive system. Taxes on consumption represent a smaller proportion of the income of the rich than they do of the poor. [In an income tax] the base of taxation is income. I understand that dividends are not taxed in Brazil. Usually they are received by wealthier taxpayers. Therefore it is also necessary to modify the definition of taxable income and increase the types of income that are taxable to make the system more equitable.